Construction industry businesses, this article is for you! Whether you’re a master of residential or commercial projects, or specialise in plumbing, plastering or pool installations, don’t miss out on these essential pointers.
One of the biggest challenges you’ll encounter as a business owner is maintaining steady profitability. It may seem daunting, but there’s a simple solution that can have a huge impact: improving your internal accounting processes.
Believe it or not, consistency and accuracy in areas like documentation, tracking, and budgeting can be the key to unlocking greater profits. But beware — without proper streamlining and improvement, these tasks can quickly become a blackhole of wasted time and resources. Don’t let your hard work go to waste, but take control of your internal accounting processes and watch your profits soar!
Here are six critical factors you should investigate and address to improve the profitability of your business.
1. Setting and Sticking to a Budget
If you fail to plan, you plan to fail! Having a budget is the same as having a blueprint for your projects — if you don’t know what success looks like, it’s going to be tough to stay on track. So, if you haven’t already, set a budget and make it a priority to know that budget inside-out.
A good place to start is simply understanding how much finance you need to come in on a monthly, quarterly, or annual basis in order to make a profit and not a loss. In other words, your breakeven baseline. This includes understanding your fixed and variable costs. From there, you can then work to grow your business by establishing the absolute minimum you need to earn to achieve profitability.
Once you’ve got that covered, understanding your industry standards will give you a sense of direction. So, benchmark! Check out your competitors and go from there.
2. How Accurate is Your Quoting System?
Now that you know your budget, let’s move on to your quoting system. When you quote a project, have you been sure to factor in all variables that will impact your business expenses? This includes subcontractors, labor, materials, and travel costs like fuel or tolls. Don’t leave anything out, or you might end up with some unpleasant surprises down the line.
And let’s not forget about your gross margin and profit margin — do you know yours? It’s important to get these figures right because if you don’t, you might end up with a lot less profit than you were expecting.
For instance, have you taken into consideration a share of overheads for your quotes when calculating the 40% profit margin you are seeking to achieve? It might seem like a small detail, but little variances add up to large amounts when the process is repeated over and over again.
3. Reviewing Your Cost Structure
Cost structure is another important factor that can make or break your profitability. Fixed costs, such as rent, administration, marketing, cars, IT, subscriptions, and insurances, should be taken into consideration when you look at your budget.
A quick-win here to improve profitability is removing any pockets of wasted spend. Easy ways to eliminate wasted spend and improve financial efficiency include:
- Unsubscribing from retainer payments that you don’t actively need or use;
- Reviewing insurances;
- Reviewing rental terms/financing for bank interest;
- Reviewing electricity contracts and rates;
- Reviewing marketing costs; and
- Reviewing wages and efficiencies i.e. does your internal finance team provide information on time?
4. Comparing Quotes vs. Final Numbers
At the end of each project, it’s vital to review your quoted figures versus the final numbers. If there is a notable discrepancy between the two, it’s important to find out why.
Did you underestimate the cost of the job from the start, or were there unexpected issues that ate into your profit margins? By pinpointing these challenges, you’ll be better equipped to avoid them in the future.
This might seem obvious, but sales are crucial in driving a business’ profitability. There are three things you can look at in this space to increase profitability.
Firstly, how do your prices stack up against your competitors or industry benchmarks? If you are playing it safe and your rates are more conservative, you could be in a good position to increase your prices in line with similar businesses.
Secondly, do you have a diverse sales pipeline? After all, it’s vital to not put all our eggs in one basket. The more diverse your sales pipeline is, the more robust your business will be.
Finally, have you considered expanding your services and increasing your service contracts? Not only will this boost your profits, but it’ll also give you an edge over the competition.
6. Record Keeping
Last but not least, it’s crucial to keep accurate financial records. It’s the foundation of smart decision-making, forecasting, and budgeting for your business.
As a part of your documentation, be sure to keep track of your work-in-progress projects — make note of the work that has been completed and the costs that have been incurred to date. This will give you a better understanding of your current financial standing, and allow you to be able to make informed decisions that lead to long-term success.
We’re Here to Help!
Streamlining and improving accounting processes is essential to improving the profitability of your construction business. If you’re struggling to achieve profitability, or aren’t sure where to start, don’t hesitate to reach out to the business advisory team at Hoffman Kelly for help. We are here to provide invaluable advice on how to grow your business and achieve your financial goals. Contact us today!